Estate Tax Fears Put to Bed

Family farms and small businesses hail victory

The United States House of Representatives and the United States Senate passed legislation Jan. 1 to avoid the yearend "fiscal cliff," which included a permanent solution to the estate tax, also known as the inheritance tax or death tax.

For more than a year, the nation’s farmers and ranchers have feared Congress’ inaction would let existing tax relief expire, dropping exemption levels to $1 million per individual and increasing the tax rate to 55%. This meant a farmer could pass on the first $1 million of his or her estate (money, business) without paying the tax, but anything more than that amount would betaxed at 55%. This would have crippled America’s farmers and ranchers, decimating the rural economy, says Paul Neiffer, partner and certified professional accountant with CliftonLarsonAllen LLP.

A study by Spectrem Group found that households with a net worth of $1 million and more, excluding their primary home, reached 7.8 million in 2009. Farming and ranching families are often land rich and cash poor, with the appraised value of rural land being extremely inflated when compared to its agricultural value. More than 30 commodity groups and agriculture and small business organizations lobbied and advocated for Congress to take action. While it didn’t happen until the eleventh hour, it did happen and it’s favorable for farmers and family businesses, Neiffer says.

"The new legislation permanently sets the lifetime exemption amount for gifts and estates at $5 million dollars, which is indexed for inflation." Neiffer says, estimating that 2013 will be close to $5.25 million. "However, the top tax rate went up from 35% to 40%."

Additionally, the annual exclusion amount, which had been $13,000, was increased to $14,000. Neiffer explains that this is the amount you can give away to as many people as you want. "You don’t have to file a return and it doesn’t eat into your unified lifetime exclusion amount," Neiffer says.

The new legislation gives more than 2 million farmers the ability to pass what they have worked so hard to create and sustain down through the generations. This releases the pressure, giving people an option, says Heidi Foster, a wealth adviser and certified financial planner at American Wealth Management.

"The conversation will change from ‘can we continue the business’ to ‘do we want to,’ which makes for a much more productive discussion," Foster says, acknowledging that it’s always difficult to maintain land from generation to generation even with estate planning. "This just makes it a little less difficult."

While this is good news for farmers and small businesses, Neiffer and Kevin Spafford, Farm Journal succession planning expert and founder of Legacy by Design, say you shouldn’t wait to make succession plans for your estate.

Neiffer recommends to his clients that they review their estate plans at least on an annual basis and set up the proper entity structure. "It’s not something you can knock out in a year," he says. "Estate owners can begin making gifts now so they can stay under the $5.12 million level. If you wait, it might be too late."

Neiffer says if you don’t already have your land in an LLC or LLP, you should consider doing so. "This allows the farmer to control the operation and sets up a vehicle for him or her to make gifts easily plus you can receive significant gift discounts—up to 50%. Congress will continue to talk about removing these types of discounts, so if you take action now it only ensures your future."

Estate Plans Lead to Succession. Spafford says estate planning is a step in the succession planning process. "Estate planning is a device to transfer wealth, accumulated assets and properties to heirs, provide financial security for survivors and minimize the estate tax," he says.

"Succession planning is the process of providing for a smooth transition of the ownership and management of the business at the owner’s retirement, disability or premature death. It focuses on transferring ownership/management to wellprepared family members, co-owners, key employees or third parties."

Spafford and Foster agree that estate and succession planning are unique to each farm and ranch. Foster says the first step is the realization that life is terminable. "Most everyone likes to think that they are here [Earth] and then gone," Foster says. "However, sometimes a person might be in a position where they can’t make financial decisions for a period of months or even years. Having a trust in place helps and having a plan in place for employees, family and the business is prudent, as well."

Ask yourself what you want your business to look like when that end comes, she advises. "A plan can make sure that your spouse or significant other is taken care of; employees continue with their dayto-day routine and their financials are not disrupted; and customers or clients continue receiving products and services without disruption," Foster says.

Succession planning is important. "Your succession goals should never be subservient to any strategies or techniques employed to reduce the estate tax," Spafford notes. "That said, a comprehensive plan for succession will always include provisions to mitigate the estate tax and provide for a family’s financial security. Focusing on clearly defined goals, especially related to maintaining the integrity of the operation, protecting the financial security of all active family members and ensuring a well-prepared next generation to assume control."